If You Give a State A Federal Reserve Bank (or two…)

What are the chances that both bank presidents—one as hawk, the other as d0ve—will dissent from the Federal Open Market Committee’s policy statement? Today’s double dissent from the St. Louis and Kansas City Federal Reserve Bank (FRB) presidents highlights some curiosities about the Fed’s governance and FOMC voting rules. Why are two of the twelve FRB’s located in Missouri? And why do the two bank presidents rotate on and off the voting roster of the FOMC together? (And why does the Kansas City Fed’s regional conference take place in Jackson Hole? Never mind.)

So the Missouri curiosity isn’t the most pressing takeaway from today’s Fed statement and press conference. (I’d give that prize to Ben Bernanke’s communications challenge in conveying the FOMC’s monetary policy choices.) But the Missouri matter does beg questions about the politics that underlie the structure and governance of the Fed. And to the extent that a diversity of policy views on the FOMC complicates the Fed’s exit from unconventional asset purchases, then the design of the Fed and its monetary policy committee is worth pondering.

So, first, how did Missouri scam two banks from the committee (comprised of three Democratic political appointees) that Congress charged with organizing the Federal Reserve System in 1914? Mark Spindel and I explore the politics here, showing that patterns of economic development and the preferences of banking communities influenced where the committee located the twelve FRBS in the new Federal Reserve System. Although some believed at the time that Missouri received two banks because the Democratic Speaker of the House, Champ Clark, hailed from Missouri and because one committee member had served as president of Washington University in St. Louis, we argue that partisan connections at best smoothed the way for selecting two Missouri cities. More likely, the choice reflected the Midwest’s political economy (with Kansas City looking westward and St. Louis to the east) and the desire to curry support of the most active banking communities (which, when surveyed in 1914, favored locating a reserve bank in Kansas City, rather than in any of the regional contenders such as Lincoln, Omaha, Denver). As one Dallas banker said when he lobbied the committee to give Dallas a reserve bank:

“The matter of locating regional banks is not primarily, nor even principally, a political question. Every governmental faculty, however, has a political element and every governmental agency a political phase. No system of banking will long succeed that does violence to a great fraction of the wishes of the people of this country. Such political considerations as affect this feature of the problem are therefore of an entirely proper character for consideration by this committee.”

Those 1914 choices proved sticky. Despite a century of economic, demographic, and technological change that has altered the nation’s political economy, Congress has not relocated the FRBs. In other words, century-old politics made possible today’s conflicting dissents from the two Missouri reserve banks (suggesting the limits of a region’s economic conditions in shaping central bankers’ votes).

Second, why do Kansas City and St. Louis rotate on and off the FOMC voting roster together? When Congress revamped the FOMC in 1935, reserve bank directors were empowered to select the five reserve bank presidents who would vote on the FOMC; the 12 FRBs were paired in different groups, with Kansas City and St. Louis placed in different pairings. Moving in 1942 to increase the Fed’s role in financing the war, Congress rewrote the FOMC voting rules—giving New York a permanent seat, moving the remaining eleven FRBs into four regional groups, and creating a new voting rotation across the groups. In revamping the voting rules, Congress did nothing to prevent the Kansas City and St. Louis bank presidents from voting at the same time. Why not? No clue! Perhaps at the dawn of an era in which interest rates would be pegged—leaving little discretion for the FOMC—voting rights beyond New York’s mattered little to lawmakers. Whatever the reason, we’re left with today’s historical curiosity of conflicting signals from Missouri’s central bankers. In a period of market volatility (in part stemming from confusion over the Fed’s intentions), those conflicting dissents might be more than mere curiosities.